What You Should Know About the Roth IRA Rollover 2011

Posted on July 11, 2011 by bobrichards

Roth retirement saving accounts offer a a few different advantages over their classic counterparts, so it's a good idea to sometimes reevaluate whether or not they should have a place in your retirement plan. Even so, the process of converting funds in a traditional 401k account to a Roth IRA rollover 2011 isn't suitable for everyone. The following are a few Roth IRA rollover 2011 facts you need to know before you make your decision.

The major difference between traditional employer sponsored plans and Roth savings strategies is that traditional accounts tend to be funded with pre-tax contributions. Roth accounts are funded with post-tax funds. Although each kind of retirement savings account has its own advantages and disadvantages, you are not able to simply transfer funds between the different types of accounts.

When you initiate a Roth IRA rollover, you will be required to declare the amount of funds converted as ordinary income on your tax return. This will ensure that the taxes on your pre-tax contributions are levied and collected. Therefore, it's worth deciding ahead of time whether or not a Roth IRA rollover 2011 will bump you into a higher tax bracket for the year, as this could lead to excessive taxation.

Shares associated with employer stock are almost always very best handled using the 'Net Unrealized Appreciation' rules (NUA guidelines). Use of the NUA provision has you spend tax today on the initial cost of the shares, that could be quite low if bought years ago. Then, when you later sell the shares, you pay the preferable capitals gains rate. So while you are free to move your employer shares along with other assets in doing a Roth IRA Rollover in 2011, you can see how it is usually tax disadvantageous to do so. In many cases, it is a good investment to pay a little tax now (ordinary income tax on the basis of the shares) rather than ordinary income tax on the full value if moving the shares to a Roth IRA.

Because money invested in a Roth account will grow tax-free over time, younger individuals with longer investment horizons ahead will benefit most from a Roth IRA. If you are getting close to retirement age, you may find that the disadvantages outweigh the advantages of performing a Roth IRA conversion, particularly if you need to exhaust that cash within 5 years (see additional articles on this site about the Roth IRA rollover 2011 regarding the 5-year rule).

Similarly, if you anticipate finding yourself in a lower tax bracket upon old age, performing a Roth IRA rollover in 2011 at a higher tax rate doesn't make good financial sense. If this is the case, you'll ultimately wind up paying out more in taxes in the end.

Lose a Fortune on Your 401k Rollover

If you do not do any of these correctly:

Opt for a distribution rather than direct transfer

Rollover company stock to an IRA

Choose to rollover to a Roth IRA

Rollover to your new employer’s 401k

Rollover post-tax contributions

This is just a handful of the MANY mistakes IRS waits for you to make with your rollover. Avoid them when moving your retirement finds. Get the One-Page “401k Rollover Cheat Sheet” now and keep your money!